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Downgrade Wars

The race to the bottom for fiat currencies is being hard fought by all involved. No one wants to be the first to reach the bottom but they all have to play somewhat nice as once one or two currencies go under it will likely start a rapid cascade that will soon see most of the major currencies quickly collapse. For a while everyone tried to play nice but there are now significant cracks showing in the public facade of togetherness.

Many have already forgotten but the first real shot fired in the Downgrade Wars came from the US in late April of this year when US based Standard & Poor's downgraded the sovereign debt of Greece to "junk" status causing Greece to immediately go into crisis.

What had happened is that the US managed to stave off collapse in 2009 with trillions of dollars in quantitative easing and bailouts but by early 2010 it was becoming clear the stimulus was wearing off and the patient was again about to die. Left with very few bullets the US still had one or two tricks left up its sleeve to keep the American public's mind off of the recession and wars. This trick? Diversion.

Greece and most of the "Club Med" European nations had been in dire shape for years but in this crazy world of confidence-money it would take a downgrade from a major ratings agency to actually make everyone realize that Greece was as good as dead.


Almost all of the western nations, with the possible exceptions of Germany, Canada, Australia and Norway and a few others have been dead for a long time but it's been like a strange version of Weekend at Bernie's, except there are 15 Bernie's. Japanese Bernie is propped up over at the sushi bar, American Bernie and UK Bernie are both leaned against each other on the couch. Greek Bernie is leaned against the Gyro machine, his shirt having just caught fire. Another wacky predicament for the central bank and political smile-sters to try to attend to before everyone catches on that half the people in the room are long dead.

Yet the whole world seems to want to play along. Nobody wants to be the first to admit it. It is only when a major ratings agency finally admits the truth about the sovereign debt of these countries that all of a sudden everyone opens their eyes.

And that is what happened in April when US based Standard & Poor's, likely on direction from the US Government, decided to downgrade Greece in order to divert attention from the ongoing catastrophe in the US.


What is most shocking is that people still listen to these ratings agencies at all. The major US based ratings agencies tripped off this entire global financial crisis by labeling securitized liar loans as Triple A when they were outright ticking time bombs. Yet it seems as long as they put their AAA on something, everyone just nods and says, "Yup, that's AAA alrighty!"

But ever since the US pulled this trick on Greece and set the whole European Union under the spotlight things have changed dramatically. The one-for-all, all-for-one exterior that the major players in the G20 had been trying to portray was shattered on that day in late April. And any last semblance the US had of leadership was finally lost.

Timothy Geithner went to the G20 meeting in Toronto in late June to implore the other nations to continue on with stimulus but no one was listening to him or the US anymore. Soon after, European Central Bank President Jean-Claude Trichet wrote an op-ed piece in the Financial Times on July 23rd entitled, "Stimulate No More - It Is Now Time For All To Tighten."

A smart idea, if it were to actually happen. Or even were possible.

But we know better than to listen to Central Bank hucksters. Even if Trichet was being genuine and did want to tighten and stop the inflation he can't. He can't, at least, without Greece, Portugal, Spain, Ireland, Italy and more defaulting on their debts causing the European monetary union to collapse.

Trichet's commentary in the Financial Times came only a few days after Moody's downgraded Ireland to Aa2 on July 19. Just the latest shot fired in the Downgrade Wars.


Not to be outdone, two days later, on July 21, China entered the fray. China's leading credit rating agency, Dagong Global Credit Rating Co., cut the USA's credit rating from AAA to AA. Of course this didn't even make it into the controlled mass media in the US but it is big news.

It's big news because China is the largest holder of US Government debt (see chart below).

Foreign Holders of US Treasuries

China has increased its holding of US Government debt 900% since 2001! That is an average of 100% per year when based on 2001 levels. If there was a way to invest in a derivative of the increase in Chinese debt over the last 10 years this would have been the investment of the decade!

But it appears that China is finally putting on the brakes. In August of 2009 they owned $936.5 billion in US Government debt. The last reported figures, for May 2010, show that China "only" owned $867.7 billion. That's a 7% drop in the last 9 months. That's a mammoth change.


All of this serves to explain why gold is up in terms of every currency in the world in the last year. Interestingly, as of today, gold is up the exact same amount in Euros as it is in US Dollars in the last 12 months: 26%.

That's a big gain in one year but something you might expect from the one asset that no ratings agency in the world can downgrade. It's always AAA, and not just because some corrupt agency says so.


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